 Metals Meltdown
James Mound
JMTG's Head Analyst
April 29, 2004
The precious metals market has seen a large selloff over the
last few weeks, and has broken down so hard and fast that most
traders are left to wonder if they are in the midst of a metals
meltdown. What we are truly seeing, however, is one of the best
shakeouts of all time.
As gold broke to a new high above $431, silver was in the $8.50
area and the market had the feel of a runaway bull run. Typical
of such a move, the market essentially let all the stops get
hit above the previous high, only to end the day with a spike
high key reversal that got backed by a strong dollar move up
and thus the selloff ensued.
There are two elements to analyze here.
First, we must look at the US dollar and analyze if we are in
fact seeing a reemergence of the US dollar as 84.85 (85) appears
to have held as bottom support.
Second, we need to review the price action in gold and silver
to determine the motivation and structure of this possible meltdown.
The US dollar has recouped approximately 20% of its 2-year plunge.
However, this rally has been choppy and at best slow and tired.
While one could argue that the rally is based on the theoretical
recovery of the US economy, it is certainly not acting like a
currency on the rise. Although not unlike the stock market's
rebound, this dollar bounce comes on the heels of a lack of US
political commitment to enforce a direction of its currency.
A bland and almost non-existent Fed participation in the dollar
is the perfect excuse to support a 2 year selloff and give the
market the dead cat bounce it has been waiting for. Moreover,
until the US government establishes a true position in its currency
(via economic policy, G-7 meeting, etc.) it is difficult, if
not impossible, to say we are in a period of US dollar strength
or a bull run in the dollar. If that is in fact the case, the
US dollar does not promote further selling in metals. Keep in
mind that gold is priced in US dollars and therefore has an inverse
relationship to dollar moves. Thus if the dollar is weaker, then
foreign currency is stronger and able to buy gold and silver
at reduced prices thereby giving price support to metals.
The selloff in gold and silver were severe liquidations spurred
on by large private investors and institutional traders and complimented
by fear-based selling from Joe speculator. Prior to the plunge,
many rumors and material facts existed that suggest a squeeze
was in place by large physical buyers in gold and especially
silver. Assuming that has some real merit, one could easily argue
this selloff was a release of the squeeze play by a number of
large participants. That type of liquidation is fast and furious
and tends to give a couple of days of false support as these
large volume players ease selling pressure to then resume selling
at a stronger price by allowing buying interest back in the market.
This is a very difficult situation to calculate a bottom or end
to. Because of the relationship to the US dollar, the metals
market has only certain elements that allow liquidation without
supporting fundamentals. Thus one could argue that the selloff
was spurred on by the dollar rally but oversold as the dollar
rally was not nearly as strong as the metals selloff.
In summation, the US dollar strength is not inversely comparable
to the metals selloff and offers a unique opportunity to enter
metals at a value price. Call option premiums are at a discount,
and market volatility allows for numerous option- and futures-based
trade opportunities. Today's strong spike reversal suggests that
a bottom may already be in or very nearby.
April 29, 3004
James Mound
JMTG's Head Analyst
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